QoQ DPU decline has moderated

On a q-o-q basis, 3Q18 revenue was 5.7% higher but NPI was 0.1% lower, as the Solaris conversion saw higher revenue as well as higher property expenses. 3Q18 DPU fell by 1.5% q-o-q primarily due to

lower NPI and

higher net finance expenses due to the repayment of the Sponsor’s interest-free loan.

We note that the DPU declines have moderated q-o-q – recall that 1Q18 and 2Q18 DPU fell 4.3% q-o-q and 4.5% q-o-q respectively.

Rental reversions skewed by Solaris renewals

In 3Q18, rental reversions of 3.6% and -2.4% were recorded for renewals (including forward renewals) and new leases, vs. 2Q18’s -9.7% (renewals) and -16.4% (new leases).

After the briefing, we note that 3Q figures were skewed by Solaris leases (which posted high single-digit growth over the master lease rental) and believe that rental reversions for the wider portfolio came in closer to -10% or so.

We continue to expect the industrial space in Singapore to remain challenging for the rest of 2018, but take comfort in that only 3.1% of gross rental income is due for renewal (including underlying tenants at Solaris) for 4Q18.

Cost of equity increases to 9.2%

Meanwhile, with the completion of the Aussie acquisitions on 5 Oct, we look forward to a full-quarter contribution from the two new assets.

Our forecasts remain largely unchanged, except that they now include the contribution from Soilbuild REIT’s Australian assets and the associated costs of the transaction. With the increase in gearing to 39.2% post-acquisition, our cost of equity increases from 8.8% to 9.2%. After adjustments, our fair value drops from S$0.69 to S$0.665.

We see an opportunity to collect units in the REIT 1-2 quarters before stronger signs of operational improvement are seen. Soilbuild REIT is trading at 8.6% FY18F dividend yield and we continue to find the REIT attractively priced as at 18 Oct’s close.

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